This newsletter had been written before the stage 3 tax cuts were changed.
We had prepared an article to demonstrate the effects of different levels of income. Obviously, this is now redundant.
Due to the publicity surrounding the changes, there is any number of examples and explanations floating around, so we will not waste your time on that aspect of the change.
However, the topic of bracket creep is one we have mentioned in previous issues and is now an ongoing problem. We believe tax scales should be indexed to average wages, to prevent politicians (of all persuasions!) receiving lazy revenue to help their budget.
This is best illustrated by examining the top tax bracket. Once you earn over $180,000 (soon to be $190,000), your marginal tax rate rises to 45%. Medicare levy adds a further 2% to your tax and there is even an extra 1.5% if you do not have private health cover. So, for some people any extra work done costs almost 50% in taxes.
Additionally, these high-income earners have a cap on childcare support and if their income including superannuation contributions exceeds $250,000, a 15% surcharge applies on superannuation contributions above that figure. While this may appear equitable to many, it can certainly be seen as a disincentive to work that little bit harder.
And this is the problem with bracket creep. A 45% rate has applied to amounts above $180,000 since 2009! After 15 years it is being lifted by only $10,000. However, if the bracket had been indexed to inflation it would have risen to $260,000.
Going forward, there remains a problem. When, if ever, will the higher tax rates and brackets be adjusted? There appears to be no political capital in pursuing meaningful tax reform, this means more and more ordinary Australians will gradually move into a tax bracket that was traditionally confined to those who more obviously are earning great incomes. If high inflation persists, it will not be gradual either.